Why Protect An Internal Whistleblower

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By Christine Day
EverFi Legal Editor

When it comes to protecting employees who report securities violations by their employers, US courts are divided over whether the term “whistleblower” applies only to people who make external reports to the US Securities and Exchange Commission (SEC) or whether “whistleblower” can also include someone who makes an internal report to the company.

From the employee’s point of view, the distinction is important because the Dodd-Frank Wall Street Reform and Consumer Protection Act provides protection from retaliation for whistleblowers. If the term “whistleblower” doesn’t include an employee who reports internally, then the anti-retaliation provision doesn’t protect that employee.

Reading the Dodd-Frank Act strictly, the Fifth Circuit Court of Appeals has held that “whistleblowers” do not include people who make internal reports. In contrast, the Second Circuit Court of Appeals considered all aspects of the legislation, and guidance that the SEC issued later, when it held that protected “whistleblowers” include internal reporters. In March 2017 the Ninth Circuit Court of Appeals agreed with the Second Circuit, holding that the anti-retaliation provision protected someone who was fired after making an internal disclosure of alleged unlawful activity.

But companies shouldn’t be thinking in terms of whether whistleblowing employees are protected or unprotected. Employees who report internally are doing companies a favor by giving them the chance to take care of a problem before it gets bigger and attracts the attention of regulators.  Employers should encourage their employees to report concerns internally and should protect them when they do.

Encourage Employees to Report Wrongdoing

As we’ve discussed before, encouraging internal reporting can benefit companies. In addition to allowing companies to fix small problems before they become bigger, research has shown that whistleblowing deters wrongdoing.

To encourage employees to report, companies should make sure that they have a system with various ways for employees to report concerns; a whistleblower hotline might not be enough to ensure that everyone who wants to can make a report. A National Business Ethics Survey found that 87% of employees report wrongdoing if their company has an effective compliance and ethics program.

Further, an organization’s leadership is crucial. The importance of compliance must come down as a message from the top if it’s to be effective.

Protect Whistleblowers from Retaliation

Companies also need to be sure that they have strong anti-retaliation policies in place. The SEC has been diligent about taking action when companies retaliate against whistleblowers. And it’s in the company’s best interest to ensure that employees will report without fear of retaliation.

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